Water and Energy, Continued

Artificial pricing and farm water subsidies greatly complicate the problem of choosing between water and energy discussed in the above post.

The free market sets prices of goods and services so these resources are used where most needed. The question of where water is used; the golf course, the power plant, or for growing cotton can be answered in 2 fundamental ways.

In a communist country, government bureaucrats allocate the water as they deem best, or worse, where it buys them more political power.

In a capitalistic system, the willingness to pay determines the best use of the water. If the golf course is willing to pay the most, they get the water.

If we have learned anything from history and the study of communism and capitalism, it’s that free market pricing systems allocate resources far better than government can. One caveat is if there are costs of using a resource that are not reflected in the price, such as pollution. In this case the capitalistic system will over use the resource. The corrective mechanism is to limit the use or to tax the resource to account for the cost of the pollution. Taxing such externalities is a difficult job and is reasonably done through a centralized government.

But in the case of Arizona water and energy resources, there is no significant negative externality associated with using water, so the price system should work well. But in Arizona the price of water is highly distorted due to farm subsidies and tiered water pricing structure. If we are to let the market dictate the optimal use of water, as I suggest we should, then the competing entities should all be on a level playing field.

It causes an inefficient allocation of resources for the farmers to pay 0.1 cent per gallon, while the golf course or the power plant pay 0.2 cents per gallon (example numbers only). Both must have access to water at the same price for the market to function correctly. Otherwise, the farmers will use more than the optimal amount and the other industries will use less. This will cause the prices of goods and services to be higher than they otherwise could be and will make us all live at a lower overall standard of living. The lower price we pay for food or clothing will be more than off-set by higher prices for electricity and a round of golf.

I’m writing this post because I see too many things in print here in Arizona were communistic approaches are being discussed for rationing water between competing industries and we need to let the market decide, not the politicians, or worse, the lobbyist bending the ears of the government leaders. This non-sense economic approach is being used to dismiss the use of more Nuclear or solar thermal energy as though no substitution is possible between competing users of the water. This is absurd. The free market can allocate the water very well, if we can squelch the special interests.

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